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Tuesday, 14 February 2017

Realty, infra cos face higher tax outgo under new rule

The new rule will not allow
companies to claim tax deduction for interest paid on foreign debt above 30% of
their EBITDA.

MUMBAI: Real estate and infrastructure companies, already
struggling with thin profit margins, could see a substantial fall in profits
and a significant rise in tax liability next year due to the `thin
capitalisation' concept unveiled in the Union Budget for 2017-18.

The new rule will not allow companies to claim tax
deduction for interest paid on foreign debt above 30% of theirEBITDA(earnings before interest, tax,
depreciation and amortisation).

Experts say the most hit would be real estate and
infrastructure companies that have large chunk of international debt at project
level or in their special purpose vehicles (SPVs).

The government is expected to categorise
investments through non-convertible debentures (NCDs) and the dividend paid on
that also as debt.

Several real estate and infrastructure companies
or SPVs that have high foreign debt could be hit by the new rule, said Amrish
Shah, senior advisor, transaction tax, EY.

“However, some of the companies with high profit
margins will recover this within a couple of years as they would carry forward
the unabsorbed interest,“ he added.

Thin capitalisation concept would apply to all
companies operating in India beginning April 2017, in line with the Base
Erosion and Profit Shifting (BEPS) framework, a global agreement with 15 action
points to check tax avoidance by multinationals. India has already adopted some
of these points.

Until now Indian companies used to benefit from
dividend distribution (or interest paid) to their investors or debtors located
abroad. “Dividend has DDT (dividend distribution tax) and hence, paying
interest was the most tax-efficient method to remit money outside India, since
even tax withholding was eligible for tax credit unlike DDT. Hence, some
companies may look at reworking their capital structure using convertible
instruments or simply adjust their coupon rates,“ said Jeenendra Bhandari,
partner, MGB and Co LLP.

Typically, EBITDA is profit before any deductions.
Most real estate companies deduct interest paid on debt by subsidiaries or SPVs
from their consolidated EBITDA. As per the new rule, the interest deduction
cannot be more than 30% of EBITDA.

“Certain sectors, especially real estate and
infrastructure, are highly leveraged, and significant funding is made by
offshore-related parties. Since interest above 30% of EBITDA would not be
allowed as deduction, these sectors would be most impacted,“ said Rajesh H
Gandhi, partner, Deloitte Haskins & Sells.

Real estate and infrastructure sectors, which were
suffering from thin profit margins, used to get most of their debt investments
through Cyprus. With the government renegotiating the tax treaty with Cyprus in
2016, all investments coming through the country would attract additional tax
from April 2017.